Let’s look at the facts and figures. The reality is that many indicators are pointing to a weakening economy. To read the analysis, go here.
A credit spread is the difference in yield between two bonds of similar maturity but different credit quality. For example, if the 10-year Treasury note is trading at a yield of 2% and a 10-year corporate bond is trading at a yield of 4%, the corporate bond is said to offer a 200-basis-point spread over the Treasury.
As credit spreads rise, it gets more and more difficult to finance buybacks (credit conditions are worsening). Yields on corporate bonds go up (which coincides with a credit spread rise), which means that debt issued by the company (to buy back its own shares) has a higher interest rate. The result is that there will be less buybacks. There is a lag of 3 months (we borrow and then we spend).
 |
| Investment Grade Credit Spread Vs Buybacks |
So you could have predicted black monday in August 2015 (red graph) by looking at the rising credit spreads (blue graph).
Remember the correlation here?
Inventories can be considered a part of a group of leading indicators of business cycles. Whenever inventories surge, a possible reason could be a decrease in consumer demand. The result is that producers will cut output and sales. This will translate in a lower GDP growth.
It is worthy to plot the business inventory to sales ratio against GDP growth.
Following chart shows that the blue line is leading the red line. As inventories build up and sales go down (blue chart goes down), GDP growth will follow the trend (red chart goes down).
Exactly at that moment, gold and the Japanese yen carry trade decoupled. Also stocks decoupled from the Japanese yen carry trade. Maybe they know we know and need to find something else to manipulate the markets.
Or we could be starting the hyperinflationary phase where the yen plunges and stocks don’t go up anymore, while gold does go up.
Now why is China doing so well? I have already hinted on that in this article. Basically, we see many signs of a recovery in China. First off, the PMI had surged to 52 after several months if not years of decline. A surging PMI indicates that GDP growth is accelerating. And the evidence of an accelerated growth in GDP can also be seen in the Chinese power consumption numbers (chart below created by Correlation Economics). As our correlation shows, the rising power consumption numbers go hand in hand with GDP growth.
Next on, this China GDP growth translates itself into a positive development in the commodities market. The zinc and copper prices for example have bottomed out just recently. Also China and Hong Kong real estate have been bottoming out. I have been recommending Tai Cheung Holdings here, which has seen a nice 10% return.
To put some more evidence on display, we can see that the CRB Commodity index has seen a surge since the start of 2014, indicating a recovery in commodity prices. See chart below from Bloomberg.
And last but certainly not least we have a very important development in the currency market. Not only has the Chinese yuan stopped dropping against the U.S. dollar. The Hong Kong dollar is said to finally de-peg from the U.S. dollar, which will boost Hong Kong stocks even more.
If U.S. investors want to buy Hong Kong stocks, I recommend Hang Seng Bank (HSNGY), because this bank is based in Hong Kong and is highly correlated to the Hang Seng Index. And while you wait for the rise, you get to be paid a handsome dividend of 4%.
Remember Marc Faber recommending Vietnam? To go further on the case for investing in Vietnamese stocks in 2014, I wanted to point out several things.
First off, the savings rate in Vietnam is extremely high. We have 28% domestic savings rates and that’s always a sign of a great economy. You can’t produce and invest without savings.
Second, the inflation rate has come down from 20% in the past to 6% now. This will be great going forward as the dong (Vietnamese currency) will be stable going forward.
 |
| Chart 1: Vietnam CPI |
To point to a correlation on this blog, we know that the currency valuation is correlated to the trade deficit of a country and indeed, when we look at the trade deficit in Vietnam, we can see that Vietnam recently went into a surplus. This also explains why the dong is so strong lately and why the inflation rate is coming down.
 |
| Chart 2: Trade Deficit Vietnam |
To read further, go here.
One of the reasons I’m bullish on emerging market stocks is because they underperformed the U.S. in 2013. But most importantly, the P/E ratio of these emerging market stocks is at all time lows (P/E=11), while the P/E ratio in the U.S. is at 22. This is a valuation of more than double the emerging market stocks.
 |
| PE ratio |
I think this underperformance in EM stocks is due to the underperformance of the CRB index as compared to U.S. stocks, which can also be seen here. Stocks went up (yellow line), but the CRB index (orange line) went down.
 |
| Stocks Vs. CRB Index |
I believe the CRB index is now in a recovery phase. China’s power consumption has been steadily increasing.
 |
| China Power Consumption |
That’s why I’m bullish on emerging market stocks. If you’re not convinced yet, don’t believe me, listen to Peter Schiff.
To read more, go here.
From Kingworldnews:
According to Austrian Business Cycle Theory the prices of capital goods (= asset price inflation) increase first in the course of an inflationary process, while consumer price inflation (= rising consumer prices) only ensues later. The asset price inflation that is currently in train can be identified by a multitude of symptoms. Prices for antiques, expensive wines, vintage cars, but also real estate and especially stocks recently increased strongly.
The Potemkin Villages were Russian constructions, created to deceive others into thinking something is better than it really is.
The Potemkin Rally describes how the Federal Reserve is manipulating the market in order to create a deception of a rising stock market. It looks like the economy is improving, but it’s actually just a mirage.
As long as the following chart (stocks divided by Fed Balance Sheet) stays flat, the stock market rally is really engineered by the Federal Reserve. If the Federal Reserve takes the punch bowl away, everything collapses.
There are implications if this correlation is true. It means that when the U.S. government prints money (otherwise known as QE), the blue graph goes down (in a scenario where the stock market flattens out). If the blue graph goes down, the red graph goes down too, which means the unemployment rate goes up.
This means we are venturing into a paradox. It means that we get to a stage where money printing makes the unemployment rate go up instead of down. Janet Yellen’s QE won’t help employment.
But the alternative is equally bad. Not to print money could make the stock market crash, which will also result in a declining blue chart. So we are now stuck between a rock and a hard place.
Correlation Economics (Backup) 